HNB: Growth of the Croatian economy in the second quarter could slow to 1.6%

The Croatian economy's growth could slow down significantly in the second quarter of 2026, according to preliminary estimates from the Croatian National Bank (HNB). The bank projects a year-on-year growth rate of 1.6 percent, down from 2.2 percent in the first quarter, while the quarterly growth might reach just 0.3 percent. These figures come from the HNB’s Bulletin, which highlights high-frequency economic indicators showing subdued activity after a period of stagnation earlier in the year. According to the HNB’s rapid assessment model, industrial production volume fell by 2.5 percent in the first two months of the second quarter compared to the average of the first quarter. This decline was particularly evident in energy production, capital goods, and non-durable consumer goods. In addition, retail trade volume saw a sharp drop in May, declining by two percent month-on-month. As a result, real retail trade volume in April and May was 0.8 percent lower than the average of the previous quarter. HNB analysts noted that these developments could be linked to rising energy prices following the outbreak of war in the Middle East, which negatively impacted households' disposable income and reduced consumer confidence. While the framework agreement reached between the United States and Iran suggested a potential gradual easing of this negative impact, renewed tensions at the beginning of July increased uncertainty regarding its implementation. Analysts warned that risks associated with rising oil prices, inflation, and consumer optimism were further heightened. In addition to industrial and retail challenges, physical indicators of tourism activity have worsened, with a decline in arrivals and overnight stays of around one percent on an annual basis during the second quarter. However, there has been a noticeable recovery in consumer and business sentiment towards the end of the second quarter, remaining above long-term averages despite most indicators still being below those of the first quarter. Construction output remained stagnant in April compared to March, although it was one percent higher than the average of the first quarter due to carry-over effects from the increase in March. Employment levels rose slightly during the second quarter of 2026, with nominal wages continuing their strong upward trend. Although employment in May remained stable compared to the previous month, it was 0.4 percent higher in April and May compared to January and February. On an annual basis, employment growth in May reached 0.9 percent, matching the rates recorded in April and March. Unemployment increased slightly on a monthly basis in May by 1.9 percent, but continued to decrease on a quarterly basis, reaching 4.5 percent lower in April and May compared to January and February. This improvement was partly attributed to a larger number of individuals removed from the unemployment registry by the Croatian Employment Service (HZZ) for reasons unrelated to recent employment trends. Average nominal gross wages rose by 1.3 percent in May on a monthly basis, following a 0.7 percent increase in April. Wages in both the public sector and the rest of the economy grew at similar intensities. On an annual basis, the growth in nominal gross wages accelerated to 9.1 percent in May, following an 8 percent increase in April. The revised downward projection from the HNB reflects the adverse performance in key sectors such as industry and retail trade, primarily influenced by the unfavorable conditions in May. The bank emphasized that while some indicators showed signs of recovery, the overall economic environment remains challenging, with ongoing uncertainties related to geopolitical tensions and their potential impacts on inflation and consumer behavior. The slowdown in economic growth underscores the need for careful monitoring of macroeconomic indicators and policy responses to address emerging challenges. With employment and wage growth showing resilience, the focus will likely shift toward managing inflationary pressures and ensuring sustainable economic expansion amidst global uncertainties.